The Federal Open Market Committee consists of the seven Governors of the Federal Reserve Board and five Federal Reserve Bank presidents. The FOMC meets eight times a year in order to determine the near-term direction of monetary policy. Changes in monetary policy are now announced immediately after FOMC meetings. Why Investors Care
| Released on 9/16/08 | ||||||||||
| ||||||||||
Highlights
The Fed surprised the markets today by keeping the fed funds target rate unchanged at 2.0. The fed funds futures market before the decision had actually concluded that there was a 100 percent chance for at least a 25 basis point cut with a minority expecting a 50 basis point cut. Traders in many financial pits actually booed the decision as it streamed across monitors. But the Fed took the high road and is focusing on the difference between providing liquidity versus subsidizing credit. Earlier today, the New York Fed announced a huge injection of liquidity to offset cash hoarding by many financial institutions after the Lehman Brothers bankruptcy.
Today's Fed decision was unanimous with a vote of 10-0. Today's vote is somewhat of a contrast with recent meetings in which there has been more dissention. At the last meeting, Dallas Fed President Richard Fischer voted for a rate increase. Also, the August discount rate meeting minutes indicated that three regional Fed banks had asked for the discount rate to be raised. The Fed appears to want to present a united front on the issue of how to address current credit market problems - notably the fallout of the Lehman Brothers bankruptcy and the AIG insolvency.
The tone of the Fed's statement is similar to recent ones with equal emphasis on downside and upside risks, calling them "balanced." What markets are giving too little attention is that the Fed still is focusing on market fragility, recognizing that a problem still exists. The key new language is the reference to "ongoing measures to foster market liquidity" as part of why the economy eventually strengthens. The full context follows.
"Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth."
The Fed remains guardedly optimistic that economic growth will return to normal by 2010 while inflation eases to their target range (between 1.5 and 2.0 percent PCE price inflation).
New York Fed President Timothy Geithner remained in New York to focus on assisting in AIG solvency issues with potential creditors or buyers. His alternate was New York Fed First VP Christine M. Cumming.
The bottom line is that the Fed is still pausing in its inflation fight by doing whatever is appropriate to keep the credit markets liquid while precluding a boost in future inflation pressures. Expect the Fed to provide reserve injections as needed - it just will not be as dirt cheap as some had hoped.
On the announcement, equities in the U.S. slipped from being slight in positive territory to posting moderately strong declines.
The official announcement follows.
"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
"Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
"Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.
"The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.
"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Ms. Cumming voted as the alternate for Timothy F. Geithner."
The FOMC announcement for the September 16 FOMC policy meeting is expected cut the fed funds target rate by 25 basis points to 1.75 percent. As of close on Friday, only a fraction of traders expected a rate cut. But on Monday with the bankruptcy of Lehman Brothers and buyout of Merrill Lynch by Bank of America, sentiment swung sharply toward a rate cut. Either way, the announcement is likely to have market moving comments on the direction of Fed moves later this year and early next year.
FOMC Consensus Forecast for 9/16/06 policy vote on fed funds target: down 25 basis points to 1.75 percent
Range: 67 percent probability for a 25 basis point cut and 33 percent probability for no change, based on fed funds futures settle on September 15
![[Chart]](chart.gif)
|
The Fed closely monitors the core PCE price index to indicate whether or not policy is approximately correct, overly accommodative, or too restrictive. The PCE price index is prefered to the CPI because it is more closely aligned to the cost of living than the CPI (which measures a fixed basket of goods & services.) This chart covers monthly data and the fed funds target rate reflects the monthly average. As such, it will not correspond to the most recent fed funds rate target announced by the Fed. |
| 2008 Release Schedule | |||||||||
|
powered by
![[Econoday]](../../../../../../../../../images/logo.gif){kind=logo}